After a period of uncertainty, the Russian economy is growing. Foreign investors are keeping an eye on the market and seeking to establish a foothold on Russian soil. In early 2019, the third stage of a multibillion-dollar liquefied gas plant was commissioned in Yamal, with the fourth stage expected to be commissioned in December 2019. Further, in April 2019 Mercedes-Benz launched a Russian manufacturing plant and other businesses are also planning to open facilities in the country.
The Duma provides incentives to encourage businesses to operate in Russia. For example, it recently passed a law which permits Russian exporters and Russian subsidiaries of foreign companies that provide services to foreign clients and other companies within such client's groups to deduct the full amount of value added tax (VAT) for these services.
For many years, only the export of goods has been exempted from VAT (the tax rate is 0%). In order to confirm whether a party exports goods and has the right to apply the preferential 0% tax rate, it must submit the relevant supporting documents to the tax authority within 180 calendar days from the date on which the customs authority stamps "Cleared" on its customs declaration. In general, these supporting documents include:
- the contract under which the goods were delivered; and
- a customs declaration stamped "Cleared" and "Goods exported".
The new law will increase competition in the outbound services market, as exporters of services will be eligible to the same tax deduction that applies to the export of goods. The prompt drafting and adoption of this bill is due to the development of the digital economy.
The law will have positive economic effects for exporters of services not only because of the 0% VAT rate, but also because the total amount of VAT paid to suppliers when acquiring or producing such exported services may be deductible. At present, many exporters find themselves in situations where the amount of VAT to be deducted exceeds the amount of tax payable for domestic transactions. In such cases, exporters will now be entitled to a VAT refund (in terms of such excess) from the budget.
Exporters of services were previously deprived of using such a mechanism, as VAT on the export of services was paid depending on whether the services were sold:
- in Russia (in which case VAT was charged in Russia); or
- a foreign state (in which case VAT was not charged in Russia).
The rules for determining the place of sale of various works and services are set out in Article 148 of the Tax Code.
Nonetheless, in cases where a foreign state has not been recognised as the place of sale of services and VAT has not been charged, exporters will have no right to deduct VAT paid to Russian suppliers in connection with the provision of these services (the so-called 'input VAT'). The amounts of such input VAT will be deducted from the exporter's taxable income.
However, the new law, which will enter into force on 1 July 2019, establishes that if Russia is not recognised as the place of sale of works or services, input VAT will be deductible. This rule will not apply to transactions that are fully exempt from taxation. Rather, input VAT on such transactions must be included in the expenses that reduce taxable income.
Thus, parties will be able to avoid reducing profits by the amount of VAT charged when purchasing goods, works and services for export to save on income tax. Instead, parties can include all paid VAT in their budget calculations. Economically, this will be much more profitable and increase the competitiveness of Russian service providers on the world's markets.
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